The new state pension – why savers are not necessarily better off

Married men received seven shillings and sixpence. Simplicity itself. Since then, the state pension, which is largely based on working life national insurance contribution records, has evolved into a somewhat complex and inequitable system, with women typically receiving much less than men, given their generally shorter working lives.

Moreover, accounting for nearly 6 per cent of GDP and with a reported net present value of £4tn, the state pension, which is unfunded, has long been in danger of becoming an unsustainable burden on the public purse.

So it was with the best of intentions that the current system comprising the basic state pension, the state second pension and the means-tested pension tax credit was to morph into a simple, single tier state pension for all, regardless of income, wealth and working life NICs record.

In so doing, people would find it easier to plan for retirement while the government could better control state pension spending.

If retirement is to be enjoyed rather than endured... a median earner needs to save between 11 per cent and 14 per cent of band earnings from age 22 to state pension age

However, the new single tier state pension will not be a flat rate pension or simple at all. Paid to those who reach state pension age on or after April 6 2016, the full flat rate of £155.65 a week will only apply to those who have accrued 35 qualifying years of NICs.

For those that have not, the new state pension will be paid on a pro rata basis and only if at least a 10-year NICs record has been achieved. Moreover, that record excludes any years when the individual was contracted out of S2P, whether through a workplace pension scheme or a private pension.

Consequently, according to charity Age UK, 50,000 women and 20,000 men will be excluded, many of whom will be 'underpensioned'. That said, the typically underpensioned lower-paid workers and the self-employed are likely to be the main beneficiaries.

Benefits gap

The full flat rate of the new state pension at £155.65 appears to compare favourably with the current full basic state pension of £119.30 a week. The latter is and will continue to be paid to those currently in receipt of the state pension with at least a 30-year NICs record, regardless of their contracting-out history.

The new state pension also retains the arguably unsustainably generous ‘triple lock’ indexation of the current state pension (the higher of 2.5 per cent, consumer price index or wage growth). However, those who reach SPA on or after April 6 will cease to be eligible for S2P, which is paid on top of the existing basic state pension and can be quite generous.

Given the above, it probably comes as no great surprise that only 38 per cent of those reaching SPA in 2016 will be net beneficiaries of the new system compared with the old, with women in particular faring better under the old regime, not least those born in the 1950s, who are adversely affected by the accelerated equalisation of the SPA.

All of this, of course, highlights the importance of saving sufficiently outside of the state pension system if retirement is to be enjoyed rather than endured.

Indeed, the Pensions Policy Institute’s ‘The Future Book: unravelling workplace pensions’ suggests that to do so, a median earner needs to save between 11 per cent and 14 per cent of band earnings from age 22 to SPA. The emphasis is on both employers and employees to consider increasing joint contribution levels.

But it is also up to asset managers and investment solution providers to work with savers, policymakers and trustees to make investment choices simpler and more intuitive in order to encourage engagement with pensions early on.

Life was simple but hard in 1909, as few people had the means to save. Most people now have the means to save but choose not to do so. That has to change.

Chris Wagstaff is head of pensions and investment education at Columbia Threadneedle Investments